Latin America Business: Worst in 2016

The worst news in Latin America business in 2016.

BY LATINVEX EDITORS

The election victory of protectionist Donald Trump as the next president of the United States became the single worst event for Latin America business this year and dominates our top five list due to its negative impact.

The Mexican peso and stock exchange had its worst month in more than four years as a result of the victory.

Those hopeful that Trump’s campaign pledges were going to be replaced by sensible policies were disappointed by his post-election lies about NAFTA, bullying of Carrier, threats to Rexnord and other companies and the appointment of Wilbur Ross – a leading critic of NAFTA -- as his commerce secretary. “He’s a mercantilist who wants to open foreign markets and close U.S. markets,” Dan Ikenson, director of trade policy studies at the free-market Cato Institute, told Politico about Ross.  “Through his discretion, he could make the U.S. antidumping and countervailing duty laws more accessible to U.S. petitioners, which is bad news for consumers and consuming industries.”

#1 Trump Threatens NAFTA

Trump threatens to renegotiate or exit the hugely successfully North American Free Trade Agreement – which he falsely claims has been a “disaster.”

“We have NAFTA, which is a total and complete disaster,” Trump said on December 1 at the Indiana factory of Carrier, a company he bullied to change its Mexico plans (see below). “It’s a total and complete disaster. It’s a one-lane highway into Mexico. Nothing coming our way, everything going their way.”

Nothing? One-way lane? Last year US exports of goods to Mexico reached $236.4 billion, a fivefold increase from $41.6 billion in 1993 (the first full year of NAFTA).

Everything? Mexican exports to the United States accounted for 55 percent of two-way trade in goods. That’s hardly everything. US imports from Mexico reached $294.7 billion in 2015, a seven-fold increase from $39.9 billion.

Meanwhile, US services exports were $30.8 billion, while services imports from Mexico were $21.6 billion.

According to the Department of Commerce, U.S. exports of goods and services to Mexico supported an estimated 1.1 million jobs in 2014 (latest data available).

Apart from threatening US exports to Mexico, Trump is threatening to levy a 35 percent tax on imports from Mexico – a move that will increase prices on everything from cars to TVs, experts warn.

"To put a tax of 35 percent on our exports will be paid by (U.S.) consumers," Mexican mogul Carlos Slim said recently.

#2 Trump Bullies Carrier, Threatens Rexnord

On November 29, Trump announced that Indiana-based air-conditioner company Carrier would keep 1,000 US jobs instead of moving them to Mexico, as it had originally planned.

With Carrier’s parent company United Technologies depending on US defense contracts, Carrier felt pressured to make the deal.  Carrier originally would have saved $65 million by moving the jobs to Mexico since Carrier workers in Indianapolis earn $30 per hour in salary and benefits, compared to $3 per hour in Mexico, according to Bloomberg.

"Donald Trump's actions were a shakedown, plain and simple," wrote John Tamny, the Political Economy editor at Forbes.

Keith Hennessey, director of the National Economic Council under President George W. Bush, called it crony capitalism. "When a politician rewards his business friends and punishes his business enemies it’s called crony capitalism," he wrote on his personal blog.

Bloomberg – the leading US business news service - also attacked the decision. “Bullying companies into bad decisions is no way to make America great,” it wrote in an editorial.

Trump's intervention is typical of what happens in countries that Americans call "banana" republics, a senior Mexican state official said, according to Reuters.

Trump is now attacking another Indiana company planning a move to Mexico, Reuters reports. Rexnord announced plans in October to move a bearing plant, and its 300 jobs, from Indianapolis to Mexico.

#3 Trump Threatens Latin America Issues

Trump’s victory has also effected the rest of Latin America. Governments and companies in Latin America could halve their global bond sales next year, bankers say, reflecting both the impact of Trump's U.S. presidential victory on investor confidence in emerging markets and the success of previous refinancing efforts, Reuters reports

More than $1 billion in bond sales in Latin America have been delayed after the US presidential elections as yields on dollar-denominated debt jumped, Bloomberg reports. That includes one of the Trump Organization's own suppliers, Colombia-based Tecnoglass Inc., which put on hold its expected sale of as much as $225 million of bonds

#4  Trump Threatens FDI, M&As in Mexico

If Trump decides to exit or make significant changes to the NAFTA, cross-border mergers and acquisitions would be negatively impacted, experts warn.

The value of announced M&As in Mexico jumped 37.3 percent last year to $19.8 billion, according to Thomson Reuters. However, during the first nine months this year they fell 53 percent to $5.1 billion, in part due to the uncertainty around the US elections.

Last year, foreign direct investment in Mexico reached $28.4 billion, of which the United States accounted for a little over half (53.1 percent), according to Mexican government data.

The attraction for many US companies to invest in Mexico has been the combination of a large local market (Latin America’s second-largest economy), strong future potential growth (in part due to recent energy and telecommunications reforms), location and free trade agreements with the United States, Europe and other countries.

Trump’s attacks against companies that move jobs to Mexico and threats to slap a 35 percent tariff on imports from Mexico changes that.

#5 Trump Threatens US-Cuba Progress

Trump has signaled that he will change outgoing President Barack Obama’s Cuba policy, which included re-establishing full diplomatic relations and gradually lifting a series of restrictions on business (albeit not the embargo itself).

“If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal,” Trump tweeted on November 28.

Cuba watchers are split as to what Trump will actually do in the end. Although he pledged a tougher Cuba policy during his campaigns in Florida, his past business experience may lead him to continue or expand Obama’s Cuba policies.

Trump was looking at buying hotels in Cuba as recently as six months ago, according to a top Spanish hotel executive quoted by Bloomberg.

That would be at odds with Trump's stated Cuba policy and could have violated U.S. law against promoting tourism there.

In any case, US-Cuba relations are now on hold while Trump decides what to do.  That means uncertainty for investors and companies that were betting on improving – not deteriorating – US relations with Cuba, especially travel related companies ranging from American Airlines and Carnival Cruise Lines to Marriott and Starwood. 

"The election of Trump will add another layer of skepticism to Havana’s views of American intentions and may stymie efforts by reformists in Havana who face their own hawkish opposition within the Communist party," noted John Price, managing director of Americas Market Intelligence, in a recent Latinvex column.

© Copyright Latinvex